To understand what a "monthly minimum" is you must first understand why a monthly minimum exists. Once you grasp why it exists it becomes much easier to understand.
Every time you process a credit card transaction a small percentage of that transaction is retained by your credit card processor as their service fee for processing the transaction. This is called the discount rate. The discount rate fee is how a credit card processor generates income in exchange for the processing service that they provide. With the understanding that a credit card processor generates a tiny bit of income each time they process a transaction, you will now understand that if a merchant does not process any transactions, then the processor will not generate any revenue from that merchant. This is why the monthly minimum exists - to cover costs on inactive or dormant accounts. It is only charged when merchants are inactive and do not process transactions. With this description in mind, we can now better explain what a monthly minimum is through an example:
Example: A merchant has a monthly minimum fee of $10. In plain English, this means that the processor expects this merchant to pay at least $10 in discount rate charges during the month. For the purpose of this example we will pretend the merchant has a discount rate of 2%.
Scenario 1
- During the entire month the merchant does not process any transactions at all.
If this were to happen the merchant would be billed a monthly minimum fee of $10 because they did not process any transactions at all during the month.
Scenario 2
- The merchant processes a single $100 sale during the month.
In this example the merchant processes $100 in total sales during the month:
$100 (monthly sales) x 2% (discount rate) = $2 total discount rate fees paid during the month.
The merchant has paid a total of $2 worth of discount rate fees during the month. The monthly minimum was $10, which they didn't satisfy. We then subtract the discount rate fees that they did pay from the monthly minimum:
$10 (monthly minimum) - $2 (discount rate fees paid during the month) = $8 unpaid minimum.
So in this example the monthly minimum fee would have been $8. Remember all of the discount rate fees that are paid during the month count fully towards the monthly minimum.
Scenario 3
- The merchant processes $1,000 in sales during the month.
In this example the merchant would have paid $20 in discount rate charges. (2% of $1,000 = $20). Because they have already paid $20 in discount rate charges during the month they have surpassed their monthly minimum, so absolutely no monthly minimum fee is charged.
Something to be aware of when it comes to monthly minimums...
Monthly minimums were originally established so that processors could cover costs on dormant accounts. There is nothing wrong with this practice. What is wrong is when a processor advertises a misleadingly low monthly fee. When researching your processor remember to ask what the monthly minimum fee will be for your account. You need to know because the monthly minimum can be abused to advertise a misleadingly low monthly fee.
For example, a processor could advertise a free account with no monthly fee, but then charge a monthly minimum of $100. A small business that only did a few hundred dollars in sales per month would likely never achieve the monthly minimum. At Merchant Accounts.ca we never have and never will have misleading pricing like this. Now that you are armed with this knowledge you will know the right questions to ask. You will be able to spot a potential problem when researching a processor for your business.
In Summary: As you can see, a monthly minimum is not a fee that you should ever actually be paying. If you receive a quote from a potential processor remember that the monthly minimum should only be setup to cover costs if your account is dormant. It's not something you should be paying on a regular basis. If you operate a successful business that is active and trading then you should never actually pay a monthly minimum.
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My name is David Goodale, CEO at Merchant Accounts.ca. Pricing is often one of the most confusing topics in the merchant services industry. I strongly believe that flat (non-fluctuating) pricing and interchange plus pricing are the only good pricing models in the industry. If you have any questions about this article, pricing, or other questions in general about your merchant processing agreement don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses!
